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The Bank of England’s next move may not be to raise interest rates but to cut them below zero, its chief economist has suggested.

With global markets reeling today after the Federal Reserve’s decision to keep US interest rates at their six-year, post-crisis low, Andy Haldane said the challenge facing central banks was how to stimulate economies when interest rates had been slashed to zero.

In a provocative speech addressing the future of money as well as the future of monetary policy, Haldane said policymakers had to recognise the powerful, long-term forces that continued to drive down global interest rates.

Haldane warned that a recent softening in UK employment and other economic dates were ‘straws in the wind to suggest slowing growth into the second half of the year’.

With a strong pound hitting exports while the country was buffeted by the slowdown in China and emerging markets, Haldane said the case for a rise in UK interest rates had not been made.

Haldane, a leading ‘dove’ on the Bank’s monetary policy committee, pitched himself against the Bank's governor Mark Carney, who has said a rate rise will come 'into focus' at the turn of the year.

‘In my view, the balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside,’ Haldane said.

He explained that although the Bank of England and its counterparts in the US, Japan and Europe had injected $5 trillion of new money with quantitative easing since the financial crisis, further radical actions might be necessary in the face of profound demographic, technological and economic changes.

‘If global real interest rates are persistently lower, central banks may then need to think imaginatively about how to deal on a more durable basis with the technological constraint imposed by the zero lower bound on interest rates.

‘That may require a rethink, a fairly fundamental one, of a number of current central bank practices,’ he said.

One idea, Haldane told an audience of business owners in Northern Ireland, could be to scrap cash and adopt a state-issued digital currency like Bitcoin.

Although widely reviled as the currency for drug dealers and criminals, Haldane said Bitcoin’s distributed payment technology had ‘real potential’.

One advantage of electronic money, he explained, was that it enabled central banks to impose negative interest rates which were impossible with paper money.

This could give policy makers the ‘wriggle room’ they needed to cope with a downturn when interest rates were already close to zero. History shows that central banks need to cut interest rates by 3-5% during recessions, suggesting that the UK would need a -2.5% rate if it hit a slump now.

Haldane stressed that this was blue-sky thinking but that it was part of the Bank’s long-term policy research.

He added that the Bitcoin idea was better than the alternatives which, he said, could include doubling the Bank’s inflation target to 4% or making QE – popularly dubbed ‘money printing’ – as a permanent feature of its operations.

Both would risk macro-economic stability and undermine public trust in the Bank of England, he said.

According to the FT, Haldane "noted that even if the central bank were to set a negative interest rate, effectively charging people to hold money, consumers could get around the charge without spending more by simply hoarding cash"

Indeed Clive B: Moneyweek are on a kick they call 'Financial Martial Law' at the moment, which is very much in line with what Haldane is talking about. A further facet of 'electronic money', apart that is from eliminating the black economy, it gives government better visibility of all transactions and the possibility to force people to spend it. At the extreme, tell people to spend £X by a given date or the government will simply issue a 'delete' command for that amount from your account.

All a bit far fetched I agree, but I would hope there would be very substantial riots and a few politicians hung from lamposts in Whitehall before that happened!

The go to currency for criminals and drug dealers is cash, and always has been. Make of that what you will.

The mud slinging aimed at bitcoin and crypto currency in general is born from a combination of ignorance and fear, as always.

Ignorance about what it is (and isn't) and fear of something new that might gain significant traction and break down the fiat delusion.

The lack of any central control, by design, within the crypto framework eliminates all opportunity for privileged access and deliberate manipulation of the protocol by anyone, including those who want it supressed.

What he's really suggesting is financial tyranny, another piece of the totalitarian nightmare that we've been sleepwalking into over the last few years.

With this in place, as well as the authorities being able to track every movement and all communication, they'll also have details of every single payment you make. The value of the data for that alone is immense.

But there will be other benefits for the ugly regime that we're heading towards at break neck speed. If you are non-compliant and don't do what you're told, the authorities will simply shut you down.

Have some of the recent bank outages been a test - to see how people behave when access to money is removed? Probably not - but makes one wonder.

I honestly hope the above doesn't come to fruition and it exists solely as a conspiracy theory. However, it's where I see this country and many others heading. Frightening.

Recently I read a journo in the DT declaring how marvellous things are under the current government and how a return to Britain 30 years ago would be awful (he thought it was awful back in 1985).

Well, it might not have been a bed of roses in 1985 but so many things were significantly better than they are now and, perhaps more importantly, made sense.

We had privacy, sensible policies on debt and savings and the financial system was nowhere near as immoral and corrupt as it appears to be today.

Politicians seem to have an almost incestuous relationship with central banks, hedge funds, investment banks and big business. Policies aimed at rewarding themselves and the feckless seem to be never ending.

A chief economist suggesting that it would make sense to rob people in credit unless they spent their money would have (justifiably) met with a visit from the men in a white van back in 1985 Britain.

Banks and other financial institutions hate cash because there are no transactional costs, fees, or charges involved. It also costs money to print banknotes and mint coins and to store and even count cash.

Electronic transfers cost next to nothing, yet can be charged on each transaction even if it is only 0.1%, on trillions of expenditure that soon amounts to serious profits. PayPal of course charge 3.4%, and it will be organisations like this who ultimately control and govern the population, not our elected representatives.

Fine if you have assets and don't step out of line, but the whole world is very quickly becoming a financial Police State.

To be clear about the background, this announcement by Andy Haldane was made just after the Fed announced no interest rate rise this month. The announcement is a financial instrument to avoid a change in the in the foreign currency rates of the pound against the dollar. If this announcement hadn't been made the pound would have risen in value against the dollar.

You just need to wait a bit, as soon as the BoE see the rate of the pound falling below the level they want they will announce a future interest rate rise. These announcements are the tool they are using and they don't have to actually change rates all they have to do is announce a future possibility of a rise or a fall in interest rates and they can manipulate foreign currency exchange rates.

I'm not sure I understand this. Is the point of this suggestion that bank deposits would be "nationalised" and replaced with a credit on the Bank of England's account that would lose its value over time due to regular "charges" from negative interest rates?

If that is so, how does it differ from the present situation where?

1) the £ note is simply an IOU from the BOE, which has not been convertable into gold since (I think) 1929 and

2) inflation will eat into the value of deposits over time anyway (and by the way where does inflation fit into all this?)

Is the moral not to avoid holding large amounts of cash over long periods of time, whether in bit coins or anything else, but to invest in assets, which can be used and enjoyed in the meantime?

@patchy, It's not scaremongering. The announcement directly follow the Fed's announcement that they are not going to raise interest rates. It's manipulating the GBP exchange rate. As soon as they want to raise the value of the pound they will announce a probable future interest rate rise. "Future guidance" is a BoE policy and one of the monetary instruments they use to steer the value of the pound.

You are wrong in thinking that. Raising interest rates is another term for the BoE not printing so much money to buy government debt. So there is LESS monetary inflation. Also, when interest rates are higher on bank loans people can afford to borrow less which reduces the amount they spend which would also cause less inflation.

I agree with You Jonathan, But BOE considering lowering rates even further (report today) "to prevent de-flation" ! ? ie.increase inflation !? So I still say what am I not getting ? Raising and lowering the rate cannot produce the same result ?

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